GGDC RESEARCH MEMORANDUM 163

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1 GGDC RESEARCH MEMORANDUM 163 Value Diversity and Regional Economic Development Sjoerd Beugelsdijk, Mariko Klasing, and Petros Milionis September 2016 university of groningen groningen growth and development centre

2 Value Diversity and Regional Economic Development Sjoerd Beugelsdijk Mariko Klasing Petros Milionis University of Groningen September 2016 Abstract We investigate the nature of the link between culture and regional economic development by assessing how the prevalence of speci c values and the degree of diversity in these values at the regional level in uence economic performance within countries in Europe. Considering multiple groups of values, which have received attention in the literature, we provide evidence that the e ect of culture on economic development at the regional level is primarily linked with diversity in cultural values. In particular we show that greater value diversity has a negative e ect on regional economic performance. This adverse e ect of value diversity appears to operate by weakening institutional quality and public goods provision and is shown to be robust even when diversity is measured based on values expressed by emigrants residing outside of their region of origin. Keywords: Regional Economic Development, Cultural Values, Value Diversity. JEL Classi cation: O18, O52, R11, Z10. Faculty of Economics & Business, University of Groningen, PO Box 800, 9700 AV Groningen, The Netherlands. Addresses: 1

3 1 Introduction How do values and attitudes in uence economic development? This question has been the focus of a growing literature that investigates the potential links between culture and a variety of economic outcomes. 1 Initially, this literature on cultural economics, as it is often referred to, was centered on the notion of social trust. Higher levels of trust across countries and regions have been associated with faster growth (Knack & Keefer, 1997), better functioning institutions (Tabellini, 2008), greater organizational e ciency (Bloom et al., 2012), and stronger economic ties with the rest of the world (Guiso et al., 2009). Over time research on cultural economics moved beyond trust and started to investigate the economic impact of other dimensions of culture such as work attitudes (Lindbeck & Nyberg, 2006), gender norms (Fernandez & Fogli, 2009), views on the market economy (Alesina & Angeletos, 2005) and attitudes toward democracy (Glaeser et al., 2007). Existing research has so far mainly focused on the relationship between economic outcomes and the prevalence of speci c cultural values, such as trust, across individuals. In the context of such analyses, values expressed by di erent individuals are typically averaged at the level of a country or a region and then compared with economic outcomes at the same level of aggregation. Following this approach, researchers e ectively ignore any di erences in cultural values across individuals in the same location and concentrate on how average values di er across locations. As recent work by cross-cultural psychologists has shown, though, the degree of sharedness of values across individuals in di erent countries may vary (Schwartz & Sagie, 2000) and this variation can be larger within countries than across countries (Fischer & Schwartz, 2011). Gelfand et al. (2011) provide evidence that cultural values are more heterogeneous in countries where conformity pressure is weaker and deviant behavior is more tolerated. Furthermore, Au (1999) documents that not accounting for within-group di erences in cultural values biases the inferences one can make regarding the e ect of culture across groups. In light of these ndings a natural question is how economic outcomes are in uenced by the degree of sharedness or diversity in values within a society. While the notion of diversity has already attracted the attention of economists, diversity in terms of values is a dimension that has hardly been analyzed so far. Existing work has considered the role of diversity in terms of the genetic, ethnic, linguistic, and religious composition of the population across and within countries (Alesina et al., 2003; Fearon, 2003; Michalopoulos, 2012; Ashraf & Galor, 2013) and has shown that in most cases it has adverse e ects on economic development. For example, high diversity has been associated with slow economic growth (Easterly & Levine, 1997), low quality of institutions (La Porta et al., 1999), and poor public goods provision (Alesina et al., 2015). In this paper, we focus on the notion of value diversity and investigate whether and to what 1 See Guiso et al. (2006), Fernández (2011), and Alesina and Giuliano (2015) for excellent surveys of that literature. 2

4 extent di erences in the degree of sharedness of values across individuals matters for economic performance. 2 We measure value diversity along ve distinct groups of cultural values that relate to trust, gender norms, work norms, attitudes toward the market, and views on democracy. This gives us ve distinct indicators of value diversity which capture key cultural values that the cultural economics literature has identi ed as important. We also go beyond these speci c groups of values and measure overall diversity along a broader range of values. To separate the e ect of cultural values from that of institutions and other structural characteristics of national economies, we conduct our analysis at the sub-national level and treat regions within countries as the unit of our analysis. This is an approach that has already been followed in the literature by Beugelsdijk and van Schaik (2005) and Tabellini (2010), who related levels of trust and social capital to regional economic performance. In contrast to these papers, though, we analyze the economic e ects not only of one dimension of culture, but of multiple sets of cultural values and the degree of diversity in these values. To isolate the e ect of value diversity and value prevalence from other confounding factors that also vary at the sub-national level, we distinguish between values expressed by individuals who reside in a speci c region and those expressed by individuals who were born and raised in that region but later on emigrated out of it. This empirical strategy builds on work by Fernández and Fogli (2009), Alesina and Giuliano (2010), and Algan and Cahuc (2010), who have used it to analyze the role of culture based on samples of immigrants in the United States. Following this strategy, which is often referred to as the epidemiological approach, we explore the predictive power of variation in cultural values that is unrelated to regional economic conditions. For the purpose of our analysis we combine data on economic development with data on values and attitudes for 246 regions in 21 European Union countries. Based on the values and attitudes data, we construct measures of the prevalence of particular cultural values in di erent regions and the diversity in these values present across individuals. We then investigate the e ects that these measures have on regional levels of GDP per capita in the context of income level regressions capturing the long-run determinants of regional development as in Gennaioli et al. (2013). Our regressions include country- xed e ects to avoid identi cation problems caused by unobserved country-speci c heterogeneity. Our results suggest that diversity in cultural values has a sizeable negative e ect on regional economic development in terms of GDP per capita. We consistently obtain such a negative e ect of diversity for all ve groups of values we consider, as well as for composite indicators of overall value diversity. This adverse e ect of value diversity is independent of the positive association that the prevalence of some of these values, most notably trust, have with per capita GDP levels. Moreover, we show that this negative diversity e ect is robust to alternative econometric speci - 2 We prefer the term value diversity for our object of interest over cultural diversity, as the latter term can be interpreted more broadly and has already been used in the literature in contexts that are unrelated to cultural values. See e.g. Ottaviano and Peri (2006) as well as Ager and Brueckner (2013). 3

5 cations, such as correcting for spatial interactions, to alternative ways of measuring diversity, to comparisons with other dimensions of societal diversity related to ethnicity or religion, and to the inclusion of a multitude of control variables re ecting other determinants of regional economic development. These ndings highlight a novel channel through which culture a ects economic development: the presence or lack of shared values within the population. Exploring the nature of this channel we demonstrate that it is quantitatively important and that the adverse e ect of value diversity appears to operate through the quality of regional governance and the local provision of public goods. Thus, diversity in values can raise obstacles to good governance and cooperation at the regional level in a similar way as classical political economy (Olson, 1982) and social psychology (Byrne, 1971) arguments have suggested for other dimensions of diversity. This suggest that the degree of sharedness of values in a society is a critical aspect of culture, hitherto ignored, that deserves more attention. The paper is organized as follows. In Section 2 we brie y review previous work on cultural economics and highlight the main cultural values that the literature has focused on. In Section 3 we describe our data sources and explain how we measure the prevalence of cultural values and the degree of diversity in these values in our sample of European regions. Section 4 presents and discusses the main empirical results, Section 5 presents an extensive set of robustness tests, while Section 6 explores the underlying mechanism. Finally, Section 7 concludes. 2 Cultural Values and Economic Outcomes While there is a variety of ways to think of culture and to analyze its interaction with economic outcomes (Beugelsdijk & Maseland, 2011), our approach builds upon the de nition commonly used by economists which views culture as a collection of values, attitudes and beliefs that characterize social groups and are intergenerationally transmitted (Guiso et al., 2006; Fernandez, 2011). 3 This de nition makes explicit the multidimensional nature of culture and implicitly justi es the focus in economic analyses of culture on particular cultural dimensions that are of economic relevance. This is the approach that most economists follow and with that in mind in the present paper we concentrate on ve dimensions of culture that have attracted attention in the economics literature. I. Trust: The rst dimension we consider is trust. As already alluded to in the previous section, this was the point of entry for most economists into the study of culture. Since the early empirical studies of Knack and Keefer (1997) and La Porta et al. (1997), which built on prior 3 Alternatively culture can be de ned as the collective programing of the mind (Hofstede, 1980), as a basis for interaction and shared understandings among group members (Kroeber & Kluckhohn, 1963; Wallerstein, 1990) and as a determinant of social norms and expectations, ultimately shaping the behavior of individuals and organizations (North, 1990). 4

6 work in other elds of social science (Coleman, 1990; Putnam et al.,1993; Fukuyama, 1995), there has been a surge of work investigating the link between trust and various economic outcomes, recently summarized by Algan and Cahuc (2014). II. Work Norms: A second dimension whose implications we investigate relates to attitudes and norms towards work. Since Weber s in uential thesis on the link between the protestant work ethic and the Industrial Revolution, many scholars have explored the work-related behavior of individuals. Empirical work in this context has demonstrated a strong cultural component in this dimension (Algan & Cahuc, 2007; Fisman & Miguel, 2007; van Hoorn & Maseland, 2013). In particular, it has been shown that work norms a ect individual labor force participation decisions (Stutzer & Lalive, 2004; Giavazzi et al., 2013) and working relations within rms (Ichino & Maggi, 2000; Guiso et al., 2015). Work norms have also been shown to be closely related with family structures (Bentolila & Ichino, 2008; Alesina & Giuliano, 2010) and to interact with social insurance schemes (Lindbeck et al., 1999; Lindbeck & Nyberg, 2006). III. Gender Norms: Gender norms exhibit systematic variation across countries and regions (Mammen & Paxson, 2000) and have been shown to be very persistent (Alesina et al., 2013). Di erent norms and perceptions about the roles of males and females in society crucially a ect women s fertility and labor force participation decisions (Fortin, 2005; Fernandez & Fogli, 2009) as well as their labor market success (Vella, 1994; Tate & Yang, 2015). Even phenomena such as the gender gap in math scores and the limited success of women in sciences can be linked to the prevailing gender norms in countries (Guiso et al., 2008; Reuben et al., 2014). IV. Attitudes towards the Market: Our fourth dimension of culture relates to the extent to which people embrace the market economy. Attitudes toward the market re ect beliefs about the fairness of market outcomes and preferences about how much the government should interfere with such outcomes. These attitudes have been shown to provide the foundations for the presence and the reach of the welfare state (Alesina & Angeletos,2005; Luttmer & Singhal, 2011) and they are shaped by the perceptions of the economic system that individuals develop early in life (Alesina & Fuchs-Schuendeln, 2010; Giuliano & Spilimbergo, 2014). Moreover, distrust towards the market triggers, according to Aghion et al. (2010), increasing demand for regulation and, according to Cole et al. (2013), leads individuals to avoid available insurance options. V. Attitudes towards Democracy: Our fth cultural dimension relates to attitudes toward democracy. Such attitudes are considered essential for the well-functioning of any democratically organized society (Przeworski & Limongi, 1993; Gerring et al., 2005) and their emergence typically predates successful democratic transitions (Glaeser et al., 2007; Inglehart & Welzel, 2010; Gorodnichenko & Roland, 2013). Positive attitudes toward democracy relate to the notion of a democratic political culture (Lipset, 1959; Almond & Verba, 1963), which has a long standing tradition in political science. Recent work by economists has established that these attitudes are deeply ingrained in the memory of individuals and societies (Giuliano & Spilimbergo, 2014; 5

7 Michalopoulos & Papaioannou, 2013). Focusing on groups of values related to these ve dimensions of culture, we assess how regional economic development is associated with the overall prevalence of these values as well as with the diversity in these values within the population of each region. This di ers from previous work that has considered only the economic e ects of value prevalence and has ignored the role of value diversity. We also extend our analysis to broader measures of value prevalence and value diversity that combine these ve dimensions of culture and include values that go beyond these ve dimensions. 3 Data Sources and Empirical Strategy We conduct our analysis for 21 European Union (EU) countries. The focus on EU countries has the advantage that we can resort to data on regional economic performance reported by Eurostat, which are by construction comparable across countries and regions. The reported data follow the EU-wide sub-national division based on the NUTS (Nomenclature of Territorial Units for Statistics) system, which has a hierarchy of four levels. Level 0 is the highest level of aggregation which corresponds to the country as a whole and level 3 is the nest level of subdivision. We conduct our analysis for a sample of NUTS-2 level regions, which is the nest level of sub-national division for which all the necessary data are available. This corresponds, for example, in the U.K. to counties and in Germany to government regions ( Regierungsbezirke ). Overall, our sample includes 246 regions in 21 countries. 4 Below we brie y describe our dependent variable, our explanatory cultural variables and our main control variables. Details regarding the measurement and data sources for all variables are provided in Appendixes 1, 2 and 3. Dependent Variable: To measure regional economic performance we look at GDP per capita in each region. We focus our analysis on the level of GDP per capita as our aim is to investigate the role of culture in explaining long-run development at the regional level and in accounting for the persistent nature of the development gaps present within EU countries. With that in mind we abstract from the potential disruptions triggered by the recent nancial crisis and conduct our analysis using GDP data from the year Cultural Variables: To measure the prevalence of cultural values and the diversity in these values, we use the responses to a wide range of questions asked in the 2008 wave of the European Values Study (EVS). 5 The European Values Study is the European counterpart of the 4 From the 28 EU countries we are forced to drop Croatia, Cyprus, Estonia, Latvia, Lithuania, Luxembourg, and Malta. Croatia is excluded as it joined the EU very recently and the available data are limited. The remaining six countries are excluded because they have no sub-national division even at the NUTS 2 level due to their small sizes. Hence, for these countries we cannot make any inter-regional comparisons. 5 This choice may suggest a slight discrepancy with our dependent variable which is measured in However, the persistent nature of cultural values makes the exact timing of the interview largely irrelevant. Moreover, as we demonstrate in Section 5 below, using data from earlier waves of the EVS leads to similar results. 6

8 World Values Survey and one of the most widely-used sources for measuring values and attitudes across European countries and regions. The responses reported in EVS are based on interviews conducted with a representative strati ed random sample of the adult population. The rst wave of the survey was conducted in 1981 for a small sample of western European countries, while subsequent waves in 1990, 1999 and 2008 have expanded the coverage to more and more countries. We focus on the most recent 2008 wave of EVS. This is for two reasons. First of all, it provides the largest regional coverage, while earlier waves only include regional markers for a subset of the respondents. This allows us to conduct our analysis based on the responses of 31,085 individuals from 246 regions. Moreover, the 2008 wave is the only one that provides information on the region where each respondent lived as a child, as well as whether and where he or she has moved since then. This is crucial information for the application of the epidemiological approach, which is described in more detail below. In total, the EVS contains 172 questions on values and attitudes. We primarily focus our analysis on a sub-set of 26 questions listed in Table 1 that best capture values related to the ve dimensions of culture discussed in the previous section. The selection of questions is largely made based on the application of factor analysis and reliability analysis to ensure that each set of questions captures one underlying dimension of culture. reported in Appendix 1. The results of these analyses are The approach of quantifying cultural dimensions based on responses to survey questions has a long tradition in cross-cultural studies (Hofstede, 1980; House et al., 2004; Inglehart & Baker, 2000), and recently has also been gaining appeal in economics. Many of the 26 questions we are employing have been used in related studies before. 6 Table 1 indicates how we rescale the responses to the questions on a range between 0 and 1 to make them directly comparable to each other and rescale them such that higher values indicate attitudes that are expected to be more conducive for economic development. [Insert Table 1 around here.] Having identi ed the set of questions capturing each of the ve cultural dimensions of interest, we then aggregate individual responses by rst calculating for each question an average response for each region and then taking the mean of the regional average responses for each group of questions. This way we can measure the mean value orientation for each of the ve cultural dimensions in each region. To measure the degree of regional diversity along each dimension, we compute fractionalization scores based on a Her ndahl index which re ects the probability of two randomly drawn individuals from a given region di ering in their values. Following an approach 6 See for example Guiso et al. (2003), Alesina and Angeletos (2005), Algan and Cahuc (2007), Fernandez (2007), Aghion et al. (2010), Lindqvist and Ostling (2010), and Giavazzi et al (2013). 7

9 similar to the one we use to construct the regional mean value orientation scores, we rst calculate a regional fractionalization score for each of our 26 selected EVS questions. We then take the mean fractionalization score for the questions associated with each cultural dimension to capture the overall degree of value diversity along each of the ve cultural dimensions. Fractionalization scores measured this way are standard in diversity research and have been, among others, used by Alesina et al. (2003) and Ashraf and Galor (2013) to quantify the levels of ethno-linguistic and genetic diversity respectively. For robustness purposes we also consider alternative measures of value diversity based on the standard deviation in the individual responses to the value questions and the Greenberg polarization index. Technical details regarding these diversity indexes and their properties are discussed in Appendix 2. Beyond looking at value diversity for each of the ve dimensions separately, we also study the average degree of diversity across the ve dimensions in order to assess the degree of sharedness of values in each region more broadly. This picture is re ected in Figure 1, which presents a bar diagram of the average value diversity scores aggregated at the country level, and Figure 2, which shows the value diversity scores for each NUTS-2 region included in our sample. As can be seen in both gures, value diversity varies systematically across countries, but the aggregated country scores mask sizeable variation in value diversity that is present within countries. In fact, the observed variation in value diversity within many large EU countries, such as Germany, Italy or Spain, is larger than the variation in the country-average scores reported in Figure 1. [Insert Figure 1 around here] [Insert Figure 2 around here] Control Variables: Our main control variables re ect each region s educational attainment in terms of average years of schooling, population density, market potential measured as GDP in the surrounding regions, and the size of the agricultural sector captured by its relative share in value-added. These variables are included in all our regressions as they have been established as key predictors of regional economic development (Gennaioli et al., 2013). We also consider a wide range of additional control variables, which we introduce along the way. All details about the data sources for these control variables can be found in Appendix 3. 4 Baseline Regression Results To assess the role of cultural values in explaining the observed variation in regional economic development in EU countries, we regress the regional levels of GDP per capita on our measures of value diversity and mean value orientation along the ve dimensions of culture described above. In these regressions we always include our main set of control variables that capture key 8

10 determinants of regional economic development: population density, market potential, average years of schooling, and the size of the agricultural sector. To capture the e ects of additional unobserved country-wide development determinants, we also include country xed e ects in our regression setup and cluster the standard errors at the country level. Thus, our analysis focuses on the ability of our cultural variables to explain variation in GDP per capita within countries. 4.1 Results based on Resident Population Values Table 2 shows our baseline regression results. The rst ve columns of the table present the estimated e ects for value diversity and mean value orientation along our ve cultural dimensions. In all cases the results suggest that greater value diversity along all ve dimensions is associated with lower levels of GDP per capita. The relationship is in most cases signi cant at the 1 percent level and the coe cients indicate a sizeable e ect. On average, a reduction in value diversity along one of the ve cultural dimensions by one standard deviation is associated with an increase in GDP per capita by approximately log points. For a region with a GDP per capita equal to the sample mean of EUR 23,230 this implies an increase of approximately of 4%. This is approximately half the magnitude of the e ects that population density and market potential have on per capita GDP. [Insert Table 2 around here.] Columns 6 and 7 show the estimation results using broader aggregates of value diversity and mean value orientation. In particular, column 6 uses the average of the diversity and mean value orientation scores for the ve cultural dimensions. Column 7 uses the average diversity and corresponding mean value orientation scores for all 172 values-related questions contained in the EVS and thus re ects diversity along additional dimensions of culture. In both cases the estimation results con rm the strong inverse relationship between value diversity and regional GDP per capita that we obtain when looking at each of the ve distinct cultural dimensions. In addition to the negative e ect of value diversity on economic development, the results of Table 2 indicate also an important role of each region s mean value orientation in terms of the ve cultural dimensions. Speci cally, we nd signi cant positive e ects of trust and pro-market values, indicating that regions that are more trusting and embrace more the market economy enjoy higher levels of GDP per capita. Democratic values and work norms are also positively related to regional economic development, but the resulting coe cients are not always statistically signi cant at conventional levels. Finally, we nd that more traditional views regarding the role of women in society are associated with higher income levels, although this relationship is not very robust, as we show later on. Comparing the e ects of value diversity with those of mean value orientation, it should be noted that they are largely independent from one another. The e ects of value diversity and mean 9

11 value orientation when estimated in separate regressions, reported in Appendix 4, are similar to the e ects reported in Table 2 where they are estimated simultaneously. This suggests that the negative relation between value diversity and regional economic development along the di erent dimensions is largely independent of the positive e ect that the prevalence of speci c values, such as trust, has. This is in line with the observation of the relatively low correlation between value diversity and mean value orientation reported in Appendix 1 which ranges between 0.1 and 0.4. The regression results also document the importance of the control variables, all of which have signi cant and consistent e ects on regional levels of economic development. In line with previous literature (Ciccone & Hall, 1996; Redding & Venables, 2004; Gennaioli et al., 2013). we nd that GDP per capita is higher in regions that are more densely populated, have access to a larger potential market, higher average of schooling, and are less agricultural. These ndings con rm the important role of human capital and economic geography forces in shaping the patterns of economic development within countries. 4.2 Results based on Emigrants Values In spite of the clear and consistent patterns, the results reported in Table 1 should be interpreted with caution as they may be subject to various kinds of biases. For example, it is possible that as regions develop, people become gradually more trusting, embrace more the market economy, and their attitudes may converge. These dynamics could lead to lower value diversity and higher levels of trust and pro-market attitudes in more developed regions. Similarly, it could also be that people with certain values choose to live in regions with particular levels of economic development. In sum, the level of economic development of a region may in uence cultural values and also value diversity, and hence our estimated e ects in Table 2 may re ect a relationship operating in the opposite direction. To ensure that our regression coe cients indeed re ect the e ects that values prevalence and value diversity have on regional levels of economic development and not the other way around, we implement an empirical strategy along the lines of the epidemiological approach proposed by several scholars (Fernandez & Fogli, 2009; Alesina & Giuliano, 2010; Algan & Cahuc, 2010). The underlying rationale behind this approach is to exploit the portability of culture and study its e ect on economic outcomes based a population that originated from a country or region but is no longer residing there. Due to the persistence of culture and the relatively slow assimilation of migrants, migrating individuals will end up retaining many of their original values even after several years of moving to a di erent location. With this idea in mind, we repeat our previous analyses focusing on the values expressed by emigrants from a region whose values are bound to be similar to those of the resident population but are not a ected by current local economic conditions. To implement this empirical strategy we exploit the fact that the 2008 wave of the EVS 10

12 reports for all respondents both the region in which they were residing when interviewed and the region in which they were residing at the age of 14. Based on this information, we recalculate all our cultural variables solely based on the responses of individuals who lived in a region at the age of 14, but are currently residing outside of that region. 7 This way, we obtain a set of value diversity and mean value orientation scores that are una ected by cultural change or self-selection of migrants. Table 3 reports the results from the re-estimation of the regressions shown in Table 2 using the cultural values expressed by emigrants from each region, instead of those expressed by the resident population. The results provide a strong con rmation of our earlier conclusion regarding the e ect of value diversity. Value diversity along all ve dimensions of culture as well as in terms of the broader aggregates has a signi cant negative relation with regional economic development measured by GDP per capita. The implied magnitudes of the e ects are similar to those shown in Table 2. A reduction in value diversity by one standard deviation leads to an increase of approximately log points in GDP per capita. This corresponds to an increase in GDP per capita by approximately 3.5% for a region with a current level of GDP per capita equal to the sample mean. [Insert Table 3 around here.] For mean value orientation measured based on emigrants we nd a weaker relationship with regional economic development. The estimated magnitudes are smaller and only for the case of trust the e ect is found to be statistically signi cant. At the same time, the estimated e ects of the control variables are very similar to those in Table 2. These results suggest that sharedness of values appears to have a more robust e ect on regional economic development than the prevalence of particular cultural values. 5 Robustness Checks Our analysis so far has demonstrated a strong negative association between value diversity and regional economic development within countries. In particular the results based on emigrant values suggest that this e ect is present even if we eliminate the potential feedback that economic development may have on value diversity. Nevertheless, they do not fully preclude the possibility that the estimated relationship between diversity and development is driven by omitted variables operating at the regional level not explicitly controlled for. With that in mind in the present section we provide a set of additional regression results in order to ensure that this is not the 7 An alternative approach would be to focus on values expressed by individuals who were already residing in their current region of residence at the age of 14 and ignoring those expressed by individuals who moved into the current region as adults. This approach gives similar results, but is less powerful as it only corrects for the self-selection problem. 11

13 case. Speci cally, we test whether the obtained relationship is robust to di erent econometric speci cations and ways of measuring value diversity, to considerations of other dimensions of societal diversity, and to the inclusion of a multitude of control variables re ecting other determinants of regional economic development. For brevity, the tables in this section only report the e ects of value diversity and the additional regressors. Yet, we should note that all regressions, in addition to the variables reported, include as regressors the mean value orientation scores and the baseline set of control variables shown in Tables 2 and Measurement and Econometric Considerations One possible source of bias in our results could be due to regional characteristics that in uence development at the subnational level, which we cannot directly measure and control for. To ensure that this form of unobserved heterogeneity is not driving our results, a key test is to employ a ner set of xed e ects in our empirical setup. Given that our observations correspond to NUTS-2 level regions, we estimate our speci cation using xed e ects and clustering the standard errors at the NUTS-1 level instead of the country level. The results are shown in Panel A of Table 4 and con rm our ndings in Tables 2 and 3. For most cultural dimensions, as well as for their combined average, we still obtain a negative association of value diversity with regional GDP per capita levels, both when diversity is calculated based on resident responses and when it is calculated based on immigrant responses. The estimated magnitudes are on average weaker and the levels of statistical signi cance are lower. Yet, this is most likely due to the fact that the number of NUTS-2 regions nested in each NUTS-1 regions is quite small, which greatly reduces sub-national variation in the data we can exploit. [Insert Table 4 about here.] Using NUTS-1 level or country xed e ects combined with error clustering at the respective level removes part of the spatial correlation in the error terms. Yet, the error term correlation might extend across nearby regions that are part of di erent NUTS-1 entities or countries. With that in mind we also estimate our speci cation using a spatial error model which allows for error-term correlations across all neighboring regions. 8 The results for this set-up are shown in Panel B of Table 4. As we can see, previously unaccounted broader spatial correlation of error terms does not a ect the negative relationship between value diversity and regional GDP per capita. A further concern is that our results may be a ected by noise in the value diversity scores due the low number of respondents for some regions in the EVS. To exclude this possibility we 8 Following standard practice in the literature, we consider as neighboring regions all regions up to 400 km away from a given region, with their relative importance weighted based on the inverse distance from the region of interest. 12

14 follow two alternative approaches. We impose a minimum threshold for the number of EVS respondents per regions and we include information from earlier EVS waves. Panel C shows the results when we drop regions with less than 35 respondents. This reduces the sample size by about 45 observations, but keeps our original results intact, with the exception of the e ect of diversity in terms of gender norms. Panel D shows the results when we expand our sample of EVS respondents by including responses from all four EVS waves. This increases the total number of EVS respondents in our 246 regions of interest to 72,727. As only the 2008 wave of the EVS contains information on emigrants, Panel D only shows the results for the resident population, but not for emigrants. Again, with the exception of gender norms, our earlier results are con rmed. The ndings in Panels C and D suggest that our conclusions do not hinge on the exact number of respondents based on which we calculate our cultural variables. This is not surprising given that the EVS respondents are sampled in such a way that they are representative of the underlying population. They also suggest that our results do not hinge on using data from a particular survey year. This is further con rmed in Panel E where we employ the responses of individuals interviewed as part of the third (1999) wave of the EVS to compute the cultural variables instead of the fourth (2008) wave. Again, results can only be obtained for the resident population due to a lack of information on where the EVS respondents lived as children in the third wave. With the exception of the e ect of diversity in terms of trust, the results con rm our earlier ndings. Another consideration regarding our results is that they may be driven by the exact way in which we measure value diversity. As already alluded to in Section 3 and further explained in Appendix 2, the fractionalization index that we have used so far to measure value diversity only re ects whether the values expressed by individual respondents are di erent, but not the extent to which they are di erent, i.e. they do not re ect the degree of similarity or dissimilarity in the values expressed between individuals. Yet, the latter may also be an important dimension of value diversity. To account for that, we repeat our analysis employing in Panel F the standard deviation of the individual values scores and in Panel G the Greenberg polarization index to measure value diversity. As the use of the polarization index requires questions with more than two possible answers, Panel G only shows the result of this alternative measure of value diversity for attitudes towards the market and democracy. Both Panel F and G show that the use of these alternative measures of diversity yield results similar to the analysis based on the fractionalization index. This holds for both value diversity scores calculated based on the responses of the resident population and those based on the emigrant population. This suggests that both diversity in the values expressed by individuals and the distance between them has a negative association with regional economic development. 13

15 5.2 Comparisons with Alternative Dimensions of Diversity Beyond the above discussed measurement and econometric concerns, it is important to ensure that our main results capture the e ect of value diversity and not that of other related dimensions of diversity. We therefore re-estimate our baseline regressions including additional controls that re ect alternative dimensions of diversity. The results are shown in Table 5. [Insert Table 5 around here.] In Panel A, we consider the e ect of diversity in terms of income measured with the standard Gini coe cient. In Panel B, we follow Castello and Domenech (2002) and calculate the Gini coe cient for education inequality. These variables are constructed based on the information on individuals household income and educational attainment in the 2008 EVS. Income and educational inequality are both unrelated to within country income di erences. Most importantly, the main nding of a negative and signi cant association between value diversity and GDP per capita is not a ected by the inclusion of either measure of inequality. Another important dimension of diversity that we need to consider is ethnic diversity. Prior work has demonstrated a negative relationship between ethnic diversity and economic development (Alesina & La Ferrara, 2005), but ethnic diversity may also be correlated with value diversity. In Panel C, we present our results controlling for ethnic diversity using information on ethnic groups reported by Weidmann et al. (2010). The relation between value diversity and regional economic development is not a ected by the inclusion of ethnic diversity and the e ect of ethnic diversity itself is weak and statistically insigni cant in all but one setup. This result suggests, in line with the conclusions of Stichnoth and van der Straeten (2013), that ethnic diversity may be a less important determinant of economic performance in Europe than in other parts of the world. Furthermore, our ndings on ethnic and value diversity are in line with Desmet et al. (2015) who show that ethnic and value diversity are not necessarily overlapping. 9 In Panel D we control for the e ect of religious diversity measured by a fractionalization index, using information on the religious denomination of the EVS respondents in each region. Value di erences across individuals may partially align with di erences in their religious denomination and this correlation may a ect our previous estimates. Yet, as the results show, the inclusion of religious diversity as a control does not a ect our results regarding the e ect of value diversity. In fact religious diversity is not signi cantly related to regional GDP per capita di erences. In results not reported in the table, we also tested for the role of religion by including the regional shares of the four main religious denominations present in Europe, Protestantism, Catholicism, Orthodox Christianity and Islam, but this did not impact our results either. 9 We should note here that the correlation between ethnic diversity and all our dimensions of value diversity within countries is e ectively zero. It is only across countries that we nd a weak positive correlation between ethnic and value diversity. 14

16 5.3 Controlling for Other Correlates of Value Diversity and Economic Development The results reported so far should make us con dent that our nding of a negative association between value diversity and regional economic development is robust to the way of measuring value diversity and to alternative dimensions of diversity. In Table 6 we explore whether other factors potentially in uencing both regional economic development and value diversity may be driving our results. [Insert Table 6 about here.] One reason why some regions are more developed than others is because they are located close to other highly developed regions. To account for such spillover e ects across regions in Panel A of Table 6 we add a spatially lagged dependent variable as a regressor to our baseline speci cation. This corresponds to a weighted average of log GDP per capita of all regions that are neighboring a given region. Just as in the case of the spatial error model discussed earlier, we treat as neighbors all regions up to 400 km away from the region of interest and use spatial weights based on the inverse distance between the given region and each of its neighbors. In all cases, we nd the spatial lag coe cient to be positive and statistically signi cant, con rming the conventional wisdom that regions bene t from being close to other developed regions. Controlling for this spillover e ect, though, we still nd that greater value diversity exerts a negative in uence on regional GDP per capita. A concern regarding our emigrant-based results is that they may be subject to migrant selection. In the presence of systematic migration ows from poorer to richer regions, value diversity measured based on the values expressed by emigrants may di er systematically between rich and poor regions. To rule out that this is a ecting our estimated negative e ect of value diversity, we rst construct a measure of the share of migrants from each region that is currently living in regions that are richer than their region of origin. We compute the correlation coe cient of this share with the di erence between the value diversity scores of residents and emigrants, which we nd to be zero. Combined with the fact that on average value diversity among migrants is not higher than among residents, this suggests that our emigrant-based measures are not biased by migrant selection. To account also for additional ways in which migrant selection may a ect our regression results, nevertheless, in Panel B we include in our regressions the share of migrants that emigrated to richer regions as an additional control variable. As expected, the coe cient of this variable is negative, re ecting the systematic migration taking place from poorer to richer regions. Controlling for this e ect, though, does not alter our main results. In results not reported for brevity, we also considered controlling for the weighted average of log GDP per capita in the regions where the emigrants from each region reside nowadays to capture all the characteristics of their regions 15

17 of residence that may be correlated with the characteristics of their regions of origin. Again we nd that including this variable does not a ect our estimated negative e ect of value diversity when measuring this based on the values expressed by the emigrants of a region. Value diversity and development in a given region may also be a ected by the age-composition of the region s population. For example, measured value diversity may re ect the di erences in values present across age groups rather than di erences among individuals of the same age group. Alternatively, value di erences may be more pronounced among young people than among the old. In both cases, this would result in a correlation between the age composition of a region and the degree of value diversity in the region, which may bias our estimates. With that in mind, we include in Panel C the average age of the EVS respondents in each region as a control variable. Although there is a weak negative unconditional correlation between the average age of the respondents and our value diversity measures of about -0.18, in all cases the average age of the EVS respondents is statistically insigni cant and its inclusion does not alter our main results on value diversity. 10 Another consideration regarding our regression results so far is that they may be driven by small urban regions in our sample that consist e ectively of just one large city. In these cases, the resulting massive concentration of economic activity that is not comparable to other regions in the country may distort our estimated e ects. To rule out that these special regions are driving our results, in Panel D we include a dummy variable identifying these regions. This dummy is typically positive and statistically signi cant in the regressions, re ecting the fact that urban regions are on average richer. Yet our results for value diversity remain intact. Beyond separating city regions from the rest of our sample regions, we also incorporate in the analysis broader geographic characteristics of regions. We do so by including as regressors the absolute degrees of latitude of each region, as a proxy for local climatic conditions, and a dummy variable indicating whether a region is located on the coast and, hence, has direct access to the sea. As we can see in Panel E, both variables are insigni cant and their inclusion does not a ect our earlier results. Finally in Panel F we explore whether our results are in uenced by path-dependency in regional economic development. Centers of economic activity have historically developed in locations with good access to transportation networks or natural resources, and, due to lockin e ects, these regions may be still prosperous in present times. To capture the idea that present-day variation in economic development may be due to historical developments, we follow Tabellini (2010) and control for the level of urbanization in the year 1800, measured by the population living in cities with more than 10,000 people relative to the area of the region. In line 10 This insigni cance of the average age variable is not due to the fact that we calculate it based on EVS data. When using data for the whole population of each region we obtain very similar results. Considering alternative measures of the age composition of each region, such as the share of the working age population, also produces similar results. 16

18 with Tabellini s results we nd that historical urbanization rates have a positive and statistically signi cant e ect on current regional income levels. However, our main conclusions regarding the role of value diversity are una ected by the inclusion of this variable. 6 Exploring the Underlying Mechanism Our ndings of a strong negative e ect of value diversity on economic development extends previous work on the harmful e ects of diversity along genetic, ethnic and linguistic lines (Easterly & Levine, 1997; Alesina et al., 2003; Ashraf & Galor, 2013). 11 To understand better the nature of this e ect, in this section we explore various mechanisms through which value diversity may adversely a ect economic development. One potential mechanism relates to the quality of regional institutions, as suggested by La Porta et al. (1999), and the political organization of local society, highlighted by Dalgaard and Olsson (2013). An alternative mechanism may have to do with the provision of public goods. Speci cally, as suggested by Desmet et al. (2012), Lindqvist and Ostling (2010) and Alesina et al., (2015), diversity triggers disagreements about government priorities and these disagreements lead to an ine cient provision of public goods. In Table 7 we present a series of regressions that explore the relevance of these mechanisms. We rst relate our measure of value diversity to an index of regional quality of governance developed recently by Eurostat (Charron et al. 2015). We also relate it to a series of indicators of public goods provision suggested by Desmet et al (2012), capturing the quality of transportation infrastructure, schooling, and health care. Speci cally, transportation infrastructure is measured with the kilometers of motorways and railways per 1,000 residents, schooling availability is proxied by the school enrollment rate of 17 year-olds and health care quality is measured by the number of hospital beds per 100,000 residents and the infant mortality rate. 12 To conserve space we only report results based on the average value diversity and mean value orientation scores across the ve cultural dimensions, noting that the individual results for the ve dimensions are similar and in line with the average e ect. As in the previous sections, we measure value diversity and mean value orientation based on the responses of each region s residents and emigrants. We also include in the regression country xed e ects and control for GDP per capita since institutional quality and public goods provision tend to be higher in richer economies. This allows us to assess the role of value diversity in in uencing institutional quality and public goods provision beyond its negative e ect on GDP per capita. 11 Ashraf and Galor actually nd the relationship between diversity and development to be hump-shaped. Yet, their focus is on genetic diversity, which apart from increasing tensions across individuals and leading to coordination problems, fosters creativity and innovation. These bene cial e ects of diversity, however, are unlikely to apply to our notion of diversity which is in terms of values. Thus, our measure of value diversity is bound to re ect only the negative e ects of diversity suggested by Ashraf and Galor. 12 Note that for France, Germany and the UK some of these variables are only available at the NUTS 1 level, which leads to a smaller sample size in some of the regressions. 17

19 [Insert Table 7 around here.] Columns 1 and 2 of Table 7 document the results for the e ect of value diversity on institutional quality. In line with the hypothesis of La Porta et al. (1999) we nd a negative association between value diversity and regional institutional quality, which is more evident when we measure value diversity based on values expressed by the emigrants of a region. Columns 3 to 6 show the results for transportation infrastructure. We see that controlling for the overall level of development of a region, higher value diversity is associated with lower density of motorways and railroad networks. Columns 7 and 8 document a similar negative relationship for the provision of schooling. Finally, columns 9 to 12 document a signi cant negative relationship between value diversity and the availability and quality of health care. Controlling for their level of economic development, regions characterized by high value diversity have fewer hospital beds per person and higher rates of infant mortality. All these results are in line with prior work regarding the adverse e ect of diversity, but are established for the rst time for diversity measured in terms of values. Thus, they underscore two important channels through which diversity in values within societies can adversely a ect economic performance. 7 Conclusions The existing literature on cultural economics has suggested that certain cultural values are conducive to economic development. In the context of this literature the focus has typically been on analyzing the e ect of variation in the prevalence of such values across countries and regions. Our analysis goes beyond this approach by exploring how the degree of sharedness of these values across individuals matters for regional economic development. We do so by exploiting the regional variation in value prevalence and value diversity across di erent dimensions of culture within European Union countries and using information on the values expressed by emigrants of each region to carefully estimate the alleged e ects. Using this approach, we provide evidence that diversity in cultural values has a robust negative e ect on income per capita levels, which is both sizeable and statistically signi cant. Irrespective of whether we focus on value diversity in trust, work norms, gender norms, or pro-market or prodemocracy attitudes, the results show a negative e ect of value diversity on regional economic development. This negative e ect of value diversity comes in addition to the positive level e ects that particular values, such as trust, have on regional economic development, as previously documented by Beugelsdijk and van Schaik (2005) and Tabellini (2010). We further document in a series of robustness tests that the results do not hinge on the econometric setup or the exact way in which we measure diversity and do not change when considering the e ects of alternative dimensions of diversity and other factors that may in uence the relationship between value diversity and economic development. 18

20 The strong and robust negative e ects of value diversity uncovered in this paper suggest an additional channel through which culture in uences economic development. Our nding on the role played by value diversity also complements the rich literature that has addressed other dimensions of societal diversity such as ethnic, linguistic, religious and genetic diversity (Alesina et al., 2003; Fearon, 2003; Michalopoulos, 2012; Ashraf & Galor, 2013). In this context we nd that the adverse e ect of value diversity uncovered by our analysis is independent of the e ects that other dimensions of diversity may have at the regional level in terms of productivity and utility, such as those discussed by Ottaviano and Peri (2006) and Ager and Brueckner (2013). Overall our analysis suggests that the relationship between the cultural background of a society and its level of economic development is more complex than acknowledged so far. A complete analysis of the interaction between culture and the economy should not be limited to an analysis of the prevalence of a selected set of cultural values, but consider also the extent to which such values are shared within a population. References Ager, P., and M. Brueckner (2013): Cultural Diversity and Economic Growth: Evidence From the US During the Age of Mass Migration, European Economic Review, 64, Aghion, P., Y. Algan, P. Cahuc, and A. Shleifer (2010): Regulation and Distrust, Quarterly Journal of Economics, 125(3), Alesina, A., and G.-M. Angeletos (2005): Fairness and Redistribution, American Economic Review, 95(4), Alesina, A., A. Devleeschauwer, W. Easterly, S. Kurlat, and R. Wacziarg (2003): Fractionalization, Journal of Economic Growth, 8(2), Alesina, A., and N. Fuchs-Schündeln (2007): Good-Bye Lenin (or Not?): The E ect of Communism on People s Preferences, American Economic Review, 97(4), Alesina, A., and P. Giuliano (2010): The Power of the Family, Journal of Economic Growth, 15(2), (2015): Culture and Institutions, Journal of Economic Literature, 53(4), Alesina, A., P. Giuliano, and N. Nunn (2013): On the Origins of Gender Roles: Women and the Plough, Quarterly Journal of Economics, 128(2), Alesina, A., and E. La Ferrara (2005): Ethnic Diversity and Economic Performance, Journal of Economic Literature, 43(3), Alesina, A., S. Michalopoulos, and E. Papaioannou (2016): Ethnic Inequality, Journal of Political Economy, 124(2),

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26 PRT NLD ESP DNK GRC SWE GBR DEU FIN HUN ROU BGR SVN ITA POL FRA BEL AUT SVK IRL CZE Figure 1: Average Value Diversity in 21 EU Countries Note: The figure reflects the country-level average value diversity score across our five cultural dimensions (trust, work norms, gender norms, attitudes toward the market, attitudes toward democracy). Figure 2: Value Diversity Differences across 246 EU Regions Note: The map reflects the region-level average value diversity score across our five cultural dimensions (trust, work norms, gender norms, attitudes toward the market, attitudes toward democracy). Darker colors indicate higher value diversity.

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